October 7 2013

In May, the US treasury was able to employ some “extraordinary measures” to keep borrowing. These measures run out on 17 October. If the USS America goes down, little HMAS Australia will find it tough not to get sucked into the vortex…

 


Powered by Guardian.co.ukThis article titled “Why Australia should fear a US government default” was written by Greg Jericho, for theguardian.com on Monday 7th October 2013 07.34 UTC

The current US government shutdown has little impact on Australia, but if the US hits the debt ceiling Australia will feel the consequences of a bitterly partisan US political system.

One of the more ironic aspects of the US government shutdown is that if it goes on for much longer, the government won’t be able to calculate its economic impact because it won’t be able to collect the data.

Last Friday was supposed to be the most recent release of US jobs figures, and yet those logging on to the BLS website would have seen this:

During the shutdown the BLS won’t be able to collect the data to calculate the employment figures. Similarly the Bureau of Economic Analysis is also shut down, which rather makes collating data for the GDP figures a tad tricky.

But for Australians the big issue is not so much the shutdown. Costly as it is to the American economy – wiping about 0.1% of GDP growth each week – it does not have a great direct impact outside its borders. After all there are not many Australians employed by the US government or about to go to a US national park this weekend. The real bitter pill for the rest of the world (and US) comes in a couple weeks when the US reaches its debt ceiling.

The debt ceiling is often lazily referred to as the US government’s credit card limit, but it is not about giving the US government the right to spend more, but the ability to borrow to pay off spending it has already undertaken.

The debt ceiling is currently at $US16.699tn, and was actually reached in May but the US treasury was able to employ some “extraordinary measures” to keep borrowing. These measures will run out on 17 October.

At that point the US will no longer be able to borrow money to pay its bills. In the short run that is OK, because the US government gets enough cash from tax revenue to cover its expenses. But on 1 November it gets a bill for US$67bn for social security, medicare and veterans benefits. By 15 November the US government will be short about US$108bn. And that means defaulting on its payments.

No one really knows what will happen if the debt ceiling is not raised. Views range from, it’ll be fine, to it’ll be Armageddon. The US Treasury for its part has put out a paper that paints a pretty scary picture.

After looking at what has occurred in 2011 when the US nearly reached the debt limit, it concluded that a debt default “could have a catastrophic effect on not just financial markets but also on job creation, consumer spending and economic growth”.

It also noted that “many private-sector analysts believing that it would lead to events of the magnitude of late 2008 or worse, and the result then was a recession more severe than any seen since the Great Depression”.

And just in case you are a glass-half-full kind of person and you still have some optimism, the report ends on this less than upbeat note: “Considering the experience of countries around that world that have defaulted on their debt… [the] consequences, including high interest rates, reduced investment, higher debt payments, and slow economic growth, could last for more than a generation.”

Cheery.

Thus far the markets have been rather sanguine. The US Treasury 10-year bond yields are lower now than they were a month ago – suggesting investors are not too spooked about the long-term US economy. There is also a sense that investors are a bit jaded – the debt ceiling fight is now becoming an annual event.

But in the past few days, investors have become very worried about holding US treasury bonds which mature in the next month.

The spread of the six-month to one-month treasury bonds fell off a cliff, to the point where investors are now demanding a higher return for buying a one-month US treasury bond than for a six-month.

Should the default actually occur you could expect those jaded investors would suddenly get very alert. A US government default would put the world economy into uncharted waters. Around 87 % of all foreign exchange transactions involve US dollars. If the US government can no longer guarantee it will pay its bills (even for a short time), that rather upsets the integrity of the entire system.

In 2011 when the debt ceiling was almost breached, the US’s credit rating was downgraded to AA. It hurt US confidence, put a big hand brake on economic growth, and the turmoil on financial markets reduced American household wealth by around US$2.4tn.

For Australia, in 2011 our dollar at the time soared to US$1.10 as the American currency lost value. With the value of our dollar already rising the last thing our manufacturing sector needs is for the dollar to be given a boost.

For the moment most expect congress to back down and raise the debt ceiling (or perhaps even suspend it for a few more months like they did last year).

But Australians should hope that the US gets its act in order soon. While it is nice to think that we are now bound to China, a look over the past 20 years shows that aside from extraordinary circumstances – such as the dotcom bubble and September 11 attack, and our mining boom in 2006 – Australia and the US’s GDP growth is quite closely linked.

Our economy is like a dinghy in the ocean of the international economy. If the US scuttles itself though political intransigence, without another mining boom, little HMAS Australia would find it tough not to get sucked into the vortex as USS America goes down.

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USA 

Bank of England governor’s move to persuade markets that interest rates will not immediately rise has provoked skepticism. His first 100 days as Bank of England governor have been a noisy medley of speeches, impeccably tailored photo-calls and pzazz…

 


Powered by Guardian.co.ukThis article titled “Is Mark Carney’s forward guidance plan a step backwards?” was written by Heather Stewart, for theguardian.com on Monday 7th October 2013 14.00 UTC

If Mark Carney was going to live up to his billing as a “rock star central banker” – and his £874,000 a year pay package – he had to arrive in Threadneedle Street on a crashing crescendo. His first 100 days as Bank of England governor have been a noisy medley of speeches, impeccably tailored photo-calls and pzazz.

From the need for more women on banknotes to his love of Everton football club, Carney has had plenty to say on a range of subjects since his appointment on 1 July this year. However, it’s the Bank’s new policy tool of forward guidance that has provoked the most interest, and a good measure of scepticism, among seasoned Bank-watchers.

Honed by Carney in Canada and adopted by the US Federal Reserve and the ECB in different forms, forward guidance is a way of signalling to the public and financial markets how the Bank will respond to shifts in the economy. In this case, the monetary policy committee has pledged to keep interest rates at their record low of 0.5% at least until the unemployment rate falls to 7%.

“Forward guidance is an attempt to persuade the markets that interest rates are not immediately going to go up,” says John Van Reenen, director of the Centre for Economic Performance at the London School of Economics. “It’s one more tool in the toolbox.”

However, as implemented by Carney and his colleagues in the UK, guidance is hedged about with three separate “knockouts” – rates would rise if inflation, financial stability or the public’s inflation expectations got out of control. Moreover, the governor has stressed that the 7% unemployment rate is not a trigger for a rate rise, but a “staging post”, which will not necessarily prompt tighter policy.

During a somewhat fraught hearing with MPs on the cross-party Treasury select committee last month, in which Carney sought to clarify the policy, chairman Andrew Tyrie expostulated that it would be a hard one to explain “down the Dog and Duck”.

Financial markets have also been less than convinced. The yield, or effective interest rate, on British government bonds – partly a measure of investors’ expectations of future interest rates – has risen rather than fallen since the Bank’s announcement. That is partly because the latest data suggests the economic outlook is improving, but rapidly rising bond yields can be worrying because they tend to push up borrowing costs right across the economy. Carney, though, has insisted he is not concerned.

Meanwhile the pound has risen almost 4% against the dollar since Carney took the helm – again signalling markets expect rates to rise sooner than the Bank is indicating. Last week sterling hit a nine-month high, although it came off that peak as investors began to question if the UK’s recovery could continue at its current pace.

“I don’t think in practice forward guidance is very successful,” says Jamie Dannhauser of Lombard Street Research. He believes Carney has failed to convince the City he means business, because he has failed to back up forward guidance with action, such as the promise of a fresh round of quantitative easing – the Bank scheme that has pumped £375bn of freshly minted money into the economy.

“[Forward guidance] doesn’t work if you’re not willing to take on the markets if you don’t get your way,” says Dannhauser.

David Blanchflower, a former member of the MPC, is more blunt: “He looks already, within a hundred days, to have lost control. Bond yields are rising, the pound is rising like mad, and they’ve got no response.”

He argues that the hedged nature of the new policy is likely to reflect “horse-trading” between Carney and his fellow MPC members. Unlike in Canada, where what the central bank governor says goes, decision-making on the MPC is by vote. With a recovery now under way, its various members are known to have differing views on what are the most pressing risks to the economy.

Another former MPC member said: “Had I been on the MPC I would have let him do it [forward guidance], because I don’t think it does any particular harm; but I don’t think it does much good either.”

It’s not just the Bank’s approach to monetary policy that has changed on Carney’s watch. When outgoing deputy governor Paul Tucker, who missed out on the top job, leaves for the US later this month, it will mark the latest in a number of personnel changes that are starting to make Carney’s Bank look quite different from Lord (Mervyn) King’s.

Blue-blooded banker Charlotte Hogg joined as the Bank’s new chief operating officer, a post that didn’t exist under the old regime, on the same day as Carney. Meanwhile Tucker will be replaced by former Treasury and Foreign Office apparatchik Sir Jon Cunliffe. With long-serving deputy governor Charlie Bean due to leave early in 2014, Carney will be given another opportunity to bring in a new broom.

Insiders say the atmosphere in the Bank’s Threadneedle Street headquarters has already changed. Carney is often seen eating lunch in the canteen or showing visitors around. His approach is less hierarchical than that of King, who was derided as the “Sun King”, by former chancellor Alistair Darling – though Carney is said to be no keener on intellectual dissent than his predecessor.

He will need all the allies he can get both inside and outside the Bank, if he is to deal successfully with what many analysts see as the greatest threat facing the economy: the risk that an unsustainable bubble is starting to inflate in Britain’s boom-bust housing market.

Carney and his colleagues on the Bank’s Financial Policy Committee (FPC), the group tasked with preventing future crashes which partly overlaps with the MPC, have new powers to rein in mortgage lending if they believe a bubble is emerging, and the governor has said he won’t hesitate to use them.

But the FPC is untested and largely unknown to the public, and bubbles are notoriously hard to spot. Using the FPC’s influence to choke off the supply of high loan-to-value mortgages, for example, would be hugely controversial at a time when large numbers of would-be buyers have been frozen out of the market. Meanwhile, the government’s extension of the Help to Buy scheme, with details to be laid out on Tuesday, is likely to increase the demand for property, potentially pushing up prices.

Van Reenen warns that if property prices do take off, Carney could find himself in an unenviable position. “We have this terrible problem in this country that house prices have got completely out of kilter with incomes. I would be very reluctant to see interest rates start pushing up. Using other methods, such as being tougher on Help to Buy, and trying to do things through prudential regulation is better – but the fundamental thing is lack of houses, and Carney can’t do anything about that.”

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Chinese finance minister: US must act fast. US Treasury secretary: Congress is ‘playing with fire’. Goldman Sachs: 4.2% wiped off US GDP without debt deal. The US AAA credit rating was downgraded by S&P two years ago after the last debt ceiling standoff…

 


Powered by Guardian.co.ukThis article titled “China warns US over debt ceiling, as markets fall again – live” was written by Graeme Wearden, for theguardian.com on Monday 7th October 2013 14.40 UTC

Oil price drops

The oil price is down today, with a barrel of Brent crude dropping by over one dollar to $108.44.

That doesn’t look to be related to the US standoff, though. Instead, it reflects relief that Tropical Storm Karen weakened over the weekend. That means oil work in the Gulf of Mexico is resuming, having been suspended a few days ago as Karen approached.

China’s warning to America to raise its debt ceiling swiftly comes as the issue becomes intertwined with Congress’s failure a week ago to agree a budget for the new fiscal year (triggering the partial government shutdown).

Terry Morris, senior vice president of National Penn Investors Trust Company in Pennsylvania, says the deadlock is a growing worry, telling Reuters:

Now you’ve got not only the budget but the debt ceiling and time is running out and everybody knows it..

The longer this goes on, the more the uncertainty, the closer the deadline and the more nervous investors are going to be.

Gold has risen to a one-week high, with the spot price gaining 1.3% to $1,327 a ounce.

Updated

Although shares are down on Wall Street, there’s no sign of panic in the US stock markets over the budget and debt ceiling deadlock.

Todd Horwitz of Average Joe Options is telling Bloomberg TV that traders don’t like the uncertainty caused by the ‘blowhards in Washington’, saying:

It’s not a panic selloff, it’s very controlled.

Horwitz added that trading volumes are light at the moment, but could pick up as the debt ceiling deadline approached

The closer we get to the 17th [October], the more action we’ll see.

Wall Sreet open: Dow falls

Shares are falling in New York as the echoes from the Wall Street opening bell fade away.

The Dow Jones industrial average is down 140 points in the first few minutes to 14931, a drop of almost 1%.

The other indices are also down, matching losses in Europe.

FTSE 100: down 51 points at 6403, – 0.8%

German DAX: down 73 points at 8549 ,- 0.85%

French CAC: down 28 points at 4136, -0.67%

Reaction to follow

Business is underway in Washington DC, with White Officials sticking to their position that President Barack Obama will not negotiate with congressional Republicans under the threat of a debt default.

Via Reuters:

“There has never been a period where you have a serious faction or a serious strategy by one political party … to use the threat of default as the main tactic in extracting policy,” White House National Economic Council Director Gene Sperling said at a Politico breakfast on Monday.

On asset class isn’t suffering from the looming debt ceiling today – US sovereign debt.

The price of 10-year Treasury bonds has actually risen this morning, showing stronger demand for America’s debt.

One-month bills are slightly weaker today, but are still changing hands at a yield (or rate of return) or just 0.147%. That doesn’t suggest bond traders are frantically dashing to sell them.

US debt is still being treated as a a place of safety, even though it’s at the centre of this particular storm.

Nick Dale-Lace, senior sales trader at CMC Markets, comments:

Ironically it seems one beneficiary of a risk off morning is US treasuries, with investors continuing to flock to the very bonds that are apparently at risk of default.

The ramifications of a default on bond markets are not clear cut, with much confusion about what the fallout would be given the dependency of the financial world on US debt markets. What are the legal triggers of such a default and are they irreversible? With every minute passed we edge closer to the unknown, and that is rarely good for the markets

US politicians get their chance to heed China’s chiding over the debt ceiling, when Congress returns to work today.

Both the House and the Senate will be in session, with votes scheduled for the afternoon.

However, none of the legislation on the table amounts to the ‘clean’ budget bill (stripped of cuts to the Affordable Care act) which the Democrats are demanding.

CBS’s News Mark Knoller is tweeting the state of play:

China warns US on debt ceiling crisis

China has raised the pressure on the US today, warning that time is running out to raise its debt ceiling.

Vice finance minister Zhu Guangyao told reporters in Beijing that America needs to take decisive steps to prevent hitting its debt limit in a fortnight’s time. The intervention came as European stock markets remained lower, on the seventh day of the US shutdown.

In the Chinese government’s first public comments on the deadlock, Zhu also urged Washington politicians to “learn lessons from history”. A reminder that the US AAA credit rating was downgraded by S&P two years ago after the last debt ceiling standoff.

Zhu said (quotes via Reuters):

The United States is totally clear about China’s concerns about the fiscal cliff.

We ask that the United States earnestly takes steps to resolve in a timely way before October 17 the political [issues] around the debt ceiling and prevent a U.S. debt default to ensure safety of Chinese investments in the United States and the global economic recovery

This is the United States’ responsibility.

As the biggest single holder of US debt, China would be in the front line to suffer if Treasury prices fell – and would obviously be hit if the US were to stumble into a technical default.

Beijing must have watched the deadlock in Washington with growing alarm (yesterday, Republicans continued to demand healthcare cuts as the Treasury Secretary warning Congress was playing with fire).

Analysts were already concerned about the lack of progress (round-up here). with Goldman Sachs warning of drastic cutbacks if America breaches the debt ceiling (details here).

Zhu’s warning added to the jitteriness in the City. Shares remain down across Europe’s trading floors, with the FTSE 100 down 50 points at 6402, a fall of 0.8%. The German and French stock markets are both down around 1%. Here’s a round-up:

Alastair McCaig, market analyst at IG, says there is an increasing ‘fear factor’ in the City as America moves closer to its debt ceiling:

The news that US politicians have again put self-interest ahead of the greater good of the country by failing to make any progress in sorting out the budget or tackling the debt ceiling will have surprised few.

As yet the US debt markets have remained calm but the closer we get to the mid-October deadline the less likely that is to remain the case.

And as mentioned earlier, the US dollar is still down against most major currencies. The pound has gained almost 0.5% to $1.608 so far today.

Updated

US showdown: What the experts are saying

Here’s a round-up of what City experts are saying about the deadlock in America over its budget talks, and the debt ceiling — which the US will hit on 17 October.

Louise Cooper of Cooper City:

As the disaster that is Washington continues, the world needs bond vigilantes to bring the political class to its senses. Sadly thanks to the Federal Reserve’s endless QE, that restraint and imposed market discipline is no longer in place. And that is dangerous. Without the market check, Washington is risking ruin.

So how are these “bond vigilantes” and how do they impose discipline on the ruling classes? They are simply the mass of investors in government debt who by their actions force governments back to the financial straight and narrow. If they think a Nation is spending too much without enough taxation, resulting in excessive deficits and ballooning debt, they will demand a higher interest rate. That is basic finance; higher risk is compensated by a higher return. So as a Nation’s debt rises rapidly, the nation has to pay higher interest rates. So bond yields – borrowing costs – rise. And that is the restraint imposed upon governments – borrowing becomes more expensive the more fiscally irresponsible the government becomes.

That is the check to stop politicians getting their country overly indebted.

And it is the same mechanism with irresponsible monetary policy too – a higher yield is required by investors to compensate for the loss in monetary value from inflation. So bond investors are really important for financially feckless nations, because they that drag the ruling classes back to sensible economic policies (by demanding higher interest rates).

But the problem is that the Federal Reserve is currently buying $85bn of bonds a month, manipulating America’s borrowing costs lower.

The Fed is the biggest player in the markets and if it wants bond yields down then few will bet they will go up. Thus there is no corrective mechanism. Without the Fed’s QE, the current Washington fiasco would have increased America’s borrowing costs and that would have helped to force politicians back to the negotiating table. It now looks likely that the Fed didn’t taper in September as it was concerned about the impact the shutdown would have on the economy. It is also likely that with no non farm payrolls figure being released on Friday, the Fed will not taper in October either.

Implicitly the Federal Reserve is bailing out the incompetency of Washington. The stick has been removed allowing the political class to play wild and threaten default.

Kit Juckes of Societe Generale

I have no vote and hope I am non-partisan in this debate but I think that this is a row about principles as much as about power, which argues for a drawn-out impasse, though the odds still favour last-minute resolution. A good question (from Joe Weisenthal) was what the Republicans would have used to justify the stalemate if Obamacare wasn’t there to argue over.

And while I am sure the GOP could have found a reason for disruptive politics, it also seems clear that Obamacare is too important to the President’s ‘legacy’ for him to compromise on that, while the right wing of the GOP is opposed on principle as much as anything else. But it’s also clear that the Republicans are
‘losing’ the public relations war. I don’t think that merely reflects my Twitter stream or choice of on-line reading.

The big winner of this mess will be Hilary Clinton. And that, in turn, means that a compromise, with tax cuts elsewhere, is likely to be found to get a deal through that allows the debt ceiling to be increased by 17 October.

Jane Foley of Rabobank

The rallying call of Republican House Speaker Boehner over the weekend that it is “time for us to stand up and fight” looks set to commit the shutdown of the US government into a second week.

The vote by Congress in favour of paying the government workers who has been sent home on leave will offset some concerns about the economic costs of the shutdown. Even so, with the October 17 deadline for a debt default looming, investors are likely to become increasingly nervous with every passing day.

Marc Ostwald of Monument Securities:

Shutdown Day 7 is unfortunately the theme for the day, and quite possibly for the week…

While mutterings ahead of the weekend suggested that Boehner said he would make sure that there was no default, and some hopeful whispers of a few Tea Party aligned members of the House softening their stance, positioning as the week starts appears to be even more entrenched.

The backlog of official US economic data is building quite rapidly with little obvious prospect of anything being published this week. One assumes that the end of week G20 meeting of finance ministers and central bank heads may have little else to discuss, though the protests about the US political impasse (assuming it has not been resolved) from other G7 and EM countries will be vociferous.

Elsa Lignos of RBC Europe:

The hard line on both sides has unsurprisingly been taken negatively by risky assets. The Yen and Swiss franc are outperforming, US equity futures are pushing down towards Thursday’s lows, while US Treasuries are still trading sideways.

It is still a case of waiting and watching on developments in Washington. Our US Strategists expect that the longer the government remains dark, the greater the likelihood that the shutdown and debt ceiling issues are resolved together, which would result in a better outcome

Investec Corporate Treasury

Some analysts have estimated that default is likely by November 1st when the Treasury Department is scheduled to make nearly $60 billion in payments to Social Security recipients, Medicare providers, civil service retirees, and active duty military service members.

With such a limited window of time available all eyes will be on the US this week to see if a resolution can be reached. In the meantime expect the US shutdown to dominate currency markets and be prepared for some volatility if a default starts to look more likely.

Updated

Greek budget predicts growth in 2014

Back to Greece, where the government has predicted a return to growth next year after a six-year slump.

The draft 2014 budget, announced this morning by deputy finance minister Christos Staikouras, also forecasts a surplus excluding debt financing costs. This is a crucial target for Athens as it aims to agree further assistance from its international partners.

Reuters has the details:

Greece will emerge from six years of recession next year, its draft 2014 budget projected on Monday, in one of the strongest signs yet that the country has left the worst of its crippling debt crisis behind.

The economy, which has shrunk about a quarter since its peak in 2007, will grow by 0.6% next year thanks to a rebound in investment and exports including tourism, the budget predicted. The economy is set to contract by 4 percent this year. Athens is also targeting a primary budget surplus of 1.6% of national output next year and is on track to post a small surplus this year.

Attaining a primary surplus – excluding debt servicing costs – is key to helping Athens secure debt relief from its international lenders.

“In the last three years Greece found itself in a painful recession with an unprecedented level of unemployment,” Deputy Finance Minister Christos Staikouras said as he unveiled the 2014 budget.

“Since this year the sacrifices have begun to yield fruit, giving the first signs of an exit from the crisis.”

These signs of recovery are encouraging hedge funds to buy stakes in Greek banks (see 9.12am) and fuelling rumours that Greece could swap some debt for new 50-year bond (see opening post).

The budget also shows that Greece will run a deficit of 2.4% (including debt costs). This will push its public debt to 174.5% of GDP, despite investors taking a haircut early last year.

How much damage would be caused if American politicians doesn’t raise the debt ceiling before the October 17 deadline?

Goldman Sachs has crunched the numbers, and told clients over the weekend that the Treasury would be forced into a drastic cutback in spending from the end of October which would wipe 4.2% off annualised GDP.

The research note (from Saturday, but still well worth flagging) showed how the Treasury is on track to hit its borrowing limit in two weeks.

After that point, the amount of money coming into the Treasury will equal only about 65% of spending going out, Goldman said. There are various ways that the US could play for time — such as prioritising some payments over others, or delaying payments altogether.

But officials would soon be forced to implement measures that would hurt growth badly, in a bid to avoid missing a debt repayment and triggering a downgrade to Selective Default status.

Here’s a flavour of the note:

If the debt limit is not raised before the Treasury depletes its cash balance, it could force the Treasury to rapidly eliminate the budget deficit to stay under the debt ceiling. We estimate that the fiscal pullback would amount to as much as 4.2% of GDP (annualized). The effect on quarterly growth rates (rather than levels) could be even greater. If this were allowed to occur, it could lead to a rapid downturn in economic activity if not reversed very quickly.

And more detail….

A very short delay past the October deadline—for instance, a few days—could delay the payment of some obligations already incurred and would create instability in the financial markets. This uncertainty alone could weigh on growth.

But a long delay—for example, several weeks—would likely result in a government shutdown much broader than the one that started October 1. In the current shutdown, there is ample cash available to pay for government activities, but the administration has lost its authority to conduct “non-essential” discretionary programs which make up about 15% of the federal budget.

By contrast, if the debt limit were not increased, after late October the administration would still have authority to make most of its scheduled payments, but would not have enough cash available to do so.

US deadlock hits euro investors

The US government shutdown debacle has hit investor confidence within the eurozone, according to the latest data from German research firm Sentix.

Sentix’s monthly measure of investor sentiment dropped to 6.1, from 6.5 in September. Analyst had expected the index to jump to 8.0, but it appears morale has suffered from the deadlock in Washington.

Sentix reported that investors’ current assessment of the United States, and the assessment of prospects in six-months time, has been noticeably damaged by the budget row and the debt ceiling fears. Its headline index for the US dropped to 16.8, from 24.8 last month.

Overall indices for the emerging markets regions rose, while those surveyed remain optimism for Japan’s prospects.

Over in Italy, Silvio Berlusconi is preparing to request a community service sentence, following his tax fraud conviction in August.

Berlusconi, whose efforts to bring down the Italian government (and reignite the eurozone crisis) failed last week, has now turned his attention to his legal troubles.

From Rome, Lizzy Davies has the story:

“Silent and humble manual tasks” are not something to which Silvio Berlusconi has ever felt naturally drawn. Before big business and politics he sold vacuum cleaners and sang on cruise ships.

Now, however, thanks to the Italian legal system, a very different kind of activity awaits him. His lawyer has said he intends to ask to serve his sentence for tax fraud in a community service placement.

Franco Coppi said that barring any last-minute changes, the former prime minister’s legal team would submit the request to the Milan courts by the end of this week. It would be then up to the judges to decide how to proceed.

More here: Silvio Berlusconi to request community service for tax fraud sentence 

Former Greek minister convicted over money-laundering charges

Court drama in Athens this morning, where a former defence minister has been found guilty of money-laundering.

Akis Tzohatzopoulos was one of 17 defendants convicted after a five-month trial. Associated Press reports that Tzohatzopoulos’s wife, ex-wife and daughter were also found guilty.

Tzohatzopoulos was charged with accepting bribes in exchange for agreeing military hardware contracts, in the 1990s and the early 2000s. The court heard that these kickbacks were laundered through a network of offshore companies and property purchases.

Sentences will be handed down tomorrow.

Greek journalist Nick Malkoutzis reckons this is the most serious conviction of a Greek politician in around 20 years.

In March, Tzohatzopoulos was convicted of corruption charges, after lying on his income statements and hiding luxurious spending. He was jailed for eight years following that case.

Updated

Some interesting stories about Greece this morning. First up: John Paulson, the hedge fund boss who made billions of dollars betting against America’s mortgage market before the crisis began, is a big fan of Greek banks.

Paulson is making a serious move into the Greek financial sector, as investors gamble that the worst of its woes are over.

The FT has the details:

Mr Paulson, best known for his successful wager against the US subprime mortgage market in 2007, praised Greece’s “very favourable pro-business government”.

“The Greek economy is improving, which should benefit the banking sector,” Mr Paulson told the Financial Times.

He confirmed his fund, Paulson & Co, had substantial stakes in Piraeus and Alpha, the two banks that have emerged in best shape from the crisis. “[Both] are now very well capitalised and poised to recover [with] good management,” he said in rare public comments.

More here: Paulson leads charge into Greek banks

The US dollar has also dropped this morning against most major currencies. This pushed the yen up around 0.5%, to ¥ 96.9 to the dollar. That won’t please Japanese exporters, who’d rather see the yen over the ¥100 mark.

America’s stock indices are also expected to drop around 0.8% when trading begins in about 6 hours, Marketwatch flags up.

The head of ratings agency Moody’s reckons America won’t default, even if it ploughs into the debt ceiling this month.

Raymond McDaniel told CNBC overnight:

Hopefully it is unlikely that we go past October 17 and fail to raise the debt ceiling, but even if that does happen, then we think that the U.S. Treasury is still going to pay on those Treasury securities.

Markets drop:

Europe’s stock markets have followed Asia by falling in early trading, as investors fret over the lack of progress over America’s government shutdown.

In London the FTSE 100 swiftly shed 46 points, or 0.7%, with 95 of the companies on the index . It’s a similar tale across Europe’s markets, with Germany’s DAX down 0.85% and the French CAC shedding 0.75%

Mike van Dulken of Accendo Markets sums up the mood in the City:

Sentiment is still dampened by USuncertainty as the partial shutdown moves into its second week and the more troubling debt ceiling of 17 October nears. How long will this drag on for? Only the politicians know.

The congressional stalemate shows no signs of progress with House Speaker Boehner adamant that a clean spending bill will not be approved while Treasury Secretary Lew says congress is playing with fire putting the nation’s sovereign reputation at risk, on top of President Obama’s highlighting of the potential impact on Q4 GDP.

It all adds up to another sea of red on the European markets:

Updated

World Bank cuts China growth forecasts

America’s deadlock isn’t the only issue worrying the City today. The World Bank has warned that East Asia’s economic growth is slowing as it cut its GDP forecasts several nations, including China.

In a new report, the Bank said weaker commodity prices means weaker growth in the region. It also urged Chinese policymakers to tackle the consequences of recent loose policy and tighten financial supervision.

Here’s a flavour:

Developing East Asia is expanding at a slower pace as China shifts from an export-oriented economy and focuses on domestic demand,” the World Bank said in its latest East Asia Pacific Economic Update report.

“Growth in larger middle-income countries including Indonesia, Malaysia, and Thailand is also softening in light of lower investment, lower global commodity prices and lower-than-expected growth of exports,” it added.

It now expects the Chinese economy to expand by 7.5% this year, down from its April forecast of 8.3%. For 2014, the forecast is cut from 8% to 7.7%.

Full story here: World Bank cuts China growth forecasts

US deadlock continues to worry the markets

Good morning, and welcome to our rolling coverage of the financial markets, the world economy, the eurozone and the business world.

It’s the seventh day of the US government shutdown, and the lack of progress in Washington continues to cast a shadow over the financial world.

Shares have slipped in Asia overnight; in Japan, the Nikkei shed another 1.2%. European markets are expected to fall again.

America seems no closer to a solution to the deadlock, nearly a week after the Federal government began shutting services and sending workers home. It is, though, closer to its debt ceiling — the US is still on track to hit its maximum borrowing limit of $16.7bn on 17 October.

Yesterday, Treasury secretary Jack Lew warned that America would default if the ceiling isn’t raised. Congress, he said, was ”playing with fire”.

Lew said:

I’m telling you that on the 17th, we run out of the ability to borrow, and Congress is playing with fire.

But the Republican-controlled House of Representatives hasn’t blinked — continuing to demand concessions from President Obama.

House speaker John Boehner was defiant last night, saying his side would “stand and fight” for concessions on issues like healthcare reforms.

Boehner told ABC television:

You’ve never seen a more dedicated group of people who are thoroughly concerned about the future of our country.

The nation’s credit is at risk because of the administration’s refusal to sit down and have a conversation.

So the deadlock continues, with investors pondering whether this impasse really could turn into a catastrophic debt default.

Stan Shamu of IG explains that traders are more nervous than late last week:

While Friday’s modest gains in US equities were driven by a glimmer of hope that leaders are getting closer, this seems to have waned over the weekend.

House speaker John Boehner was quoted as saying he wouldn’t pass a bill to increase the US debt ceiling without addressing longer-term spending and budget challenges. This has really rattled markets and is likely to result in further near-term weakness for global equities.

Not much on the economic calendar today, although we do get the latest eurozone reading of investor confidence at 9.30am BST.

In the UK, the row over the Royal Mail privatisation continues, with critics warning that it’s being sold off too cheaply.

While in Greece, there were reports on Saturday that Athens is considering swapping some bailout loans for new 50-year bonds, as part of a third aid package.

Reuters had the story: Greece mulls swapping bailout loans with 50-year bond issue: source

I’ll be tracking all the action through the day….

Updated

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